Passive Ownership and Price Informativeness

Format:Print
| Language:English

Abstract

I propose three new empirical measures of price informativeness motivated by a theoretical model. I find average price informativeness declined over the past 30 years and passive ownership is negatively correlated with price informativeness. To establish causality, I show that price informativeness decreases after quasi-exogenous increases in passive ownership arising from index additions and rebalancing. The model offers two explanations for the empirical results: passive ownership decreases investors’ incentives to become informed and leads investors to re-allocate their attention from stock-specific risks to systematic risk.